In some recent essays concerning the UK’s referendum in June to determine its membership of the European Union, and the virtues of small states as opposed to larger states, we elaborated some themes regarding how decentralisation and decentralising processes are a boon for individual liberty and a step towards harmony and economic progress. This essay will gather these thoughts together with an emphasis on how small or, rather, optimally sized institutional units pave the way towards two things that not only libertarians, but also everyone else, will claim to want to achieve – economic prosperity on the one hand, and minimal war and conflict on the other.

The mantra of statist and, indeed, mainstream political thinking is that unity, centralisation and the consolidation of states and state institutions is the way forward for peace and prosperity. Not only does this mean larger state institutions with more power but also the fusion of individual states into larger territories under a single jurisdiction. In some ways this seems plausible, even to the libertarian. Wouldn’t unified laws will aid certainty? Wouldn’t we be better off if there were no borders or tariffs to impede the trade goods and workers? And surely the possibility of war will be diminished if we all join together under one, unified banner?

The main problem with this view, however, is that it places the state, state institutions and what these institutions wish to achieve at the centre of society. All of the millions of individual people and thousands of non-state, voluntary institutions that are motivated by their own desires, values and choices are ignored or at least subsumed by the grander edifice. Most lay people who hold the centralising view probably do so naively, but it is the primary preoccupation of statists and intellectual elites that society is something to be managed, controlled or directed by them and those like them while all of the lesser beings should be made to obey quietly with the confidence that their highly educated masters are doing what is best for them. Indeed, rather than seeing any value in individual, voluntary and non-state institutions, the centralising view treats the human race as one, giant, amorphous blob, like a lump of play dough that can be shaped in any way and manner that can be chosen at will – and that the easier it is for the dough to be shaped then the better society will be. Hence, the holders of this view are likely to look favourably upon institutional centralisation and consolidation which conveniently places more power in the hands of people such as themselves to achieve their shaping of society according to their visions. This attitude was rife, at least implicitly, among the so-called “Remainers” in the UK’s “Brexit” vote on June 23rd. Not only, is it believed, that all good things flow from the top down like manna from heaven, but that anyone who was in favour of leaving the EU was, in some way, stupid, backward or a kind of provincial, country hillbilly. For instance, shortly after the referendum, Professor A C Grayling called on Parliament to block Britain’s exit from the EU on the grounds that it is Parliament’s job to determine what is best for the electorate, the latter of which lack “the expertise, patience and time” to make decisions via a direct vote. The implication of this is that the people do not know what is best for them and they have blindingly walked down the path of sheer folly by voting to leave the EU, and they should instead have placed their trust in those better educated than themselves. However, he has completely missed the lesson that should have been learned from this result. The establishment wheeled out all of the big guns in order to persuade the electorate to vote for “Remain” – including the current and the three former living Prime Ministers, most of Parliament and the Cabinet, the Bank of England’s chief and other big bank bosses, the IMF, directors from at least fifty-one FTSE 100 companies, and many heads of foreign governments including the President of the United States – and yet “Leave” still won the vote. When the advice of all of these heavyweights is rejected by the British public then, instead of stooping into a sulk over the supposed stupidity of the great unwashed and demanding that they defer to the “expertise” of their so-called representatives, Grayling and his ilk should realise that such a rejection indicates that everyone is just a bit fed up of being told what is good for them and having decisions made for them by political elites. Such decisions and endless promises of peace and prosperity have brought us, in the last twenty years, two burst financial bubbles, massive money printing that has made the rich richer while failing to provide productive jobs and increasing incomes for everyone else, and at least half a dozen disastrous wars and interventions that are producing deadly blowback in the form of terrorism. What the elitist attitude ignores is that society is not something that is there to be engineered and moulded like a lump of metal in a blacksmith’s forge. Rather, it is made up of individual people who shape it according to their individual thoughts, feelings and desires, motivated by what they believe is best for themselves and for their families. An economy is not some giant machine into which goes “input” to be processed by “jobs” into some kind of “output”, nor is it necessarily true that the higher the numbers of “input”, “jobs” and “output” the better everything is. Rather, a prosperous economy is the product of individual people trading resources voluntarily in directions that they see fit so that they can satisfy ends that they wish to see fulfilled. “Society” is not a collective that demands broad brush categories such as “food” or “houses” or “better railways” etc. Rather, it is me wanting, say, a ham sandwich at 1pm on Tuesday, or you wanting a small apartment in the Hampstead area of London to rent for three years, a business wanting to invest in a small car factory that will be completed in the five years, and everyone else wanting a myriad of highly specific ends in highly specific places at highly specific times that are the product of our own choosing. The economy is not something to be directed by central banks who squash the rate of interest down to its lowest possible point through so-called “monetary policy” or “quantitative easing” in order to “stimulate” some kind of beast into life. Rather, the rate of interest reflects the strength of everybody’s individual preferences for consumption ahead of investment so that the correct amount of resources can be sustainably channelled into roundabout methods of production. Each of us co-operates, through the division of labour, to accomplish things that we each want with the resources available in varying timescales that we are each prepared to bear. It is this co-operation of individuals to achieve their own ends through the nexus of production, trade and exchange that creates a society and not any management and direction from giant, all-encompassing institutions that achieve their ends through force.

The second problem with the centralising view is that the achievement of peace and prosperity in fact demands the very opposite of state and institutional centralisation and consolidation. As counter-intuitive as it might sound, harmony is achieved by division, not unity, while the growth and strength of the human race as a whole is accomplished by the weakness, relative to each other, of its component parts. Economic prosperity, for instance, is characterised by a growing complexity of the economic system – an increasing division of labour with more and more different people specialising in more and more different tasks to produce more and more different products for more and more different people. In other words, its natural tendency is to spread outwards from the centre with more diffused, decentralised knowledge and specialisation. Growth and centralisation of the institutions that support this prosperity under the banner of unity are therefore likely to stifle rather than aid its progress. Indeed the very concept of “unity” requires the same, repeated rules for everyone and the same approaches towards everything regardless of their individual, specialist needs. Hence you get the proliferation, in large, consolidated states, of “one size fits all solutions” that attempt to force everyone through a single, “unified” channel, as though all of us with all of our differences characteristics and requirements are being squeezed through a sausage maker to create a bland, blended puree. (Curiously, those who champion centralisation and state uniformity are also the ones who squeal for “diversity” and celebrating “difference” – at least when those diverse differences are demonstrated or practised by favoured minority groups). Indeed, it is usually, if not always, the case in nature that as something becomes bigger and more complex it is characterised by greater division and decentralisation, not by increased unity and consolidation. A human being is not simply a larger version of a single cell organism. Rather, he is made up of a countless number of individual cells that coalesce into different organs and tissues, each of which specialises in different life sustaining activities. We do not have one, single “unified” organ that pumps the blood, inhales and exhales air, rids the body of toxins, acts as a nervous system and also as a skeleton. In other words as nature achieved a complex human being by decentralising and delegating various functions to different organs that act independently of, but symbiotically with each other, so too will humans only achieve a complex and prosperous society by increasing the division of labour and the degree of specialisation in more and more decentralised institutions.

Division rather than unity is also necessary for creating and preserving the conditions that economic prosperity requires – strong private property rights, minimal taxation and minimal regulation. The benefits of a large number of divided states as opposed to large, unified states, is that if one tiny state of a size equivalent to Luxembourg implements, say, an onerous tax then only that state is affected and the disruption to everyone else in the world will be relatively minimal. If that state introduces ridiculously high border tariffs then only the small proportion of global trade into that territory will be burdened while freer trade will remain for everybody else. Similarly if that state introduces burdensome laws and regulations that infringe upon people’s lives only those people will be affected. The hampering effects of state action upon economic prosperity will, therefore, be localised and minimalised in a world of deconsolidated, small states. In a world of much larger states and state institutions, however, the introduction of a tax will affect everyone; the introduction of a new regulation will affect everyone, everywhere at all times regardless of their own needs and preferences; and the introduction of a border tariff will affect the trade of everybody who wishes to trade across the lines of the large, unified state. Hence the hampering effects of state taxes and regulations and infringements upon private property are magnified as the state becomes larger. This is not all, however, for the incentives to tax, regulate and otherwise infringe private property rights are much greater in a large, unified state than in smaller states. Smaller states are, by their nature, economically weaker than larger states and are more reliant upon maintaining the free flow of goods and services from abroad which simply cannot be produced with the resources at home. Each state will therefore compete with all other states to attract foreign investment and the unhindered import and export of goods and services by minimising taxes, regulation and border tariffs. Because the jurisdiction of a small state covers only a small area, if its rates of taxation, regulation and border tariffs are relatively high then investment will simply flee to a more competitive jurisdiction which may be only tens of miles away and the standard of living in the small state will plummet. A large state, however, whose jurisdiction covers a larger territory and possesses access to a larger number of domestic resources has no such incentive to keep its tax and regulatory burdens to the minimum. With more domestic wealth and resources available and with the threat of capital fleeing for foreign shores thousands of miles away minimised, large states are free to increase their tax and regulatory predations to a much higher degree than smaller states. One of the supposed benefits of the EU is the so-called common market – the notion that goods and workers may move freely under a single tax and regulatory code. Yet any benefits achieved by having to deal with a single code are likely to be outweighed by its gargantuan size whereas a myriad of small and trifling tax and regulatory codes in a world of greater state division is likely to be a better condition for promoting trade and prosperity. Indeed, former UKIP/Independent MEP Godfrey Bloom has referred to the EU as a “customs union” rather than a market union – in other words, a single bureaucracy rather than a single market, a chance for the state to stamp out the irritating competition between states which forces them to keep their tax and regulatory rates low (as demonstrated recently in the EU’s disagreement over the rate of tax Apple had agreed to pay to the Irish government) and replace it instead with a giant socialistic paradise of government control. Instead of emphasising the “unionisation” of tax rules and regulations, those who wish to encourage economic prosperity should instead concentrate on reducing them – and the only way to do this is to make the state entities which impose them smaller and weaker, not bigger and stronger.

The argument for the “unity” and the consolidation of states becomes even more absurd when we consider the desire to preserve peace and prevent war. Murders are committed by murderers; rapes are committed by rapists; thefts are committed by thieves. If we want to minimise the effects of murders, rapes and thefts then it is obvious that the last thing we want is for all of the murderers, rapists and thieves to join together under the banner of “unity” so they are free to combine their powers to murder, rape and steal to a greater degree with increasing ingenuity. Similarly, wars are started by states and are fought between states. Therefore, if we wish to minimise wars and their effects then it follows that we need to make states smaller and weaker; it makes no sense whatsoever to make them bigger and stronger. The argument that unifying states is likely to prevent wars seems to rest on the assumption that government is the glue that holds society together and it is in fact all of the people whom they govern who are the cause of endless conflict. Thus a bigger and powerful government is able to “unite” all of these people and stop them from fighting each other. Nothing could be further from the truth. Apart from the fact that, as libertarians, we know that the state’s dependence upon force and violence for its wellbeing renders it an institution that is bound to inflict rather than prevent conflict, bigger and more powerful states are the enablers of bigger and more destructive conflicts rather than our salvagers from them. Private actors and institutions are necessarily splintered, decentralised and reliant upon voluntary trade for their sustenance. Tiny states have equally tiny tax bases from which they can command a very limited number of resources. The ability of such persons and institutions to start and sustain wars is extremely limited. Large states, on the other hand, are vast concentrations of wealth and power which not only have enormous tax bases from which to draw the means to fund eminently more destructive firepower but the advent of central banking – another creature of centralisation and “unity” – has allowed large states to fund their conflicts through monetary inflation rather than through demanding their citizens to cough up directly. So does anyone sensibly argue that private actors and small states would achieve the level of carnage and destruction that the large and powerful belligerents managed to reach in the two world wars? Does anyone believe that a decentralised world of small states and private institutions would have had the ability to force us to endure a generation and a half of potential nuclear terror during the cold war as the vast territories of the US and the Soviet Union managed to do? The most spectacular terrorist atrocity (i.e. an attack by non-state actors) of the past generation – the destruction of the World Trade Center in 2001 – killed just fewer than 3000 people, a figure which, while undoubtedly tragic, stands in the shadow of the more than 1 million Iraqis who have died as a result of the US invasion of their country. There would, of course, be fewer states left to fight each other in a world of consolidated, centralised states. However, this completely ignores the fact that the states that remain are armed with a destructive ability far superior to any minor state or territory – and especially compared to any private criminal. Any conflicts in a decentralised world would be localised to small pinpoints on the world map, affecting, at most, a few thousand people and, with the participants lacking the resources to continue fighting and disrupting trade for too long, would probably be over in weeks if not days. Contrast this to the situation in which we languish today where the ridiculous cult of interventionism and “collective security” – another banner of “unity” – forces all such local conflicts to be escalated into drawn out, global catastrophes, as the forays into Korea, Vietnam, Iraq, Afghanistan, Libya and Syria have demonstrated. It is clear that if we wish to preserve peace and prevent war then we need to prevent the institutions that start and fight wars – states – from becoming too big and powerful.

On a related note, there is a distinct air of utopianism in the minds of the centralisers and consolidators when it comes to the issue of preserving peace. War and conflict are doubtless terrible things and we would have a much better world if they did not exist. However, it is also true that, for as long as humans have walked the earth, individuals and institutions have run into conflicts with each other and that these conflicts have been escalated into violence. This is just human nature. Unwittingly, in trying to prevent all war everywhere and at any time by “unifying us” under the yoke of bigger and larger states, the advocates of such an approach have, instead, served to escalate the size and duration of wars and vastly magnify their destructive capabilities. The more sensible approach, we would suggest, is to acknowledge that war and conflict will always exist and to recognise that a superior social system will never eliminate these aspects of humanity entirely, just as in the same way libertarians do not expect a free market in private defence and security to ever completely eradicate murder, rape and theft. Our task instead is to find ways to reduce the frequency, duration and potency of these awful things as much as possible. When it comes to war only cutting the potential belligerents down to size and reducing their ability to wage destructive wars in the first place is likely to achieve this.

As we have seen, the liberating effects of decentralisation owe themselves to the relative weakness of deconsolidated and splintered states and state institutions. However, these liberating effects do not arise out of the smallness of the states and state institutions per se. Rather it is because the individual person becomes stronger relative to an institution the more decentralised and localised that institution is. Within his own immediate family, which may consist of only half a dozen people, an individual person’s needs and views are likely to be highly influential upon the other members of the family. They will attempt to provide for and accommodate these views and needs as an active part of their lives simply because the individual is close to them both physically and emotionally. An individual will have a little less influence in his immediate community or on a civil or parish council, where there are more people involved and few of them will be as familiar with him as his immediate family. However he would clearly have more influence in such a circle than in an entire town or city. And once, of course, we get to the level of an entire country such as Great Britain, a diverse nation of various economic, social and ethnic backgrounds, a single person’s lonely vote in, say, a general election becomes a drop in the ocean along with all of the other c. 45 million votes that are eligible to be cast. And if a country such as Britain was to be absorbed into a superstate such as the EU an individual may be drowned out by a chorus of 500 million other voices. The larger an institution becomes then the more its ability to focus on the “micro” issues that really affect people’s lives is progressively diminished and is replaced by a concentration on “macro” or global issues, the successful tackling of which is determined not by the wellbeing of individual people but, rather, by the measurement of aggregated statistics. So whereas, say, a family will care about whether Dad has a job that he enjoys and pays enough to feed and house the family or whether Grandma can get her hip operation in a hospital local enough for her to travel to, large state governments will instead care about GDP and the size of hospital waiting lists. Whereas a local council might focus on whether there is a sufficient bus service to a small community or whether a particular street is clear of litter, large governments, instead, have transport and environmental policies. Who in the bureaucracy is likely to care whether these policies might overlook the specific needs of one community or street some hundreds or even thousands of miles away from the capital? More local institutions are also likely to be populated more homogenously, with each person experiencing relatively similar priorities and holding a relatively similar worldview. Thus the ability to induce empathy between those who lead and those who are led is much more likely and, indeed, may produce more of a situation of symbiosis, or a sense of “working together” to further common goals as opposed to the “command and follow” routine of large states. In other words, even though a particular institution may still function officially through the methods of power and force, the smaller and more localised it is then the more likely such an institution will approach the individual and his needs in a voluntary and peaceful manner – or at least relatively so compared to much larger, faceless state institutions. Even the socialisation of property – considered to be the antithesis of libertarians, or at least right-leaning libertarians – is less likely to be a problem in, say, a small, voluntary commune where all of the commune’s members can air their views as to how their collective resources should be put to use and where all the members are likely to share a common motivation and purpose. Yet a similar exercise on a nationwide scale has always proven to be a disaster – not to mention, of course, that is easier for someone to leave a small commune than it was to leave, say, the Soviet Union.

It is important to realise that decentralisation is not necessarily about breaking every institution down into its smallest possible parts just for the sake of it. There is nothing wrong with large entities or institutions if such sizes generate advantages that could not otherwise be attained. Rather, the primary purpose of decentralisation is to devolve decision making authority (or what might be called “sovereignty”) to its the lowest possible level and that the closer this is to the individual then the more liberating the decentralising effect will be. So there is nothing wrong with lots of individuals or small institutions deciding to form a large institution to achieve a common purpose. This is precisely what individuals do when they form companies and joint enterprises. Whatever criticism we might hurl at the inadequacy of corporate governance and executive dominance, it is still basically the case that the individual shareholder of such an entity can liquidate his position if he wishes to disassociate himself from the institution. Thus the ultimate fate of the institution is dependent upon the willingness of individuals to continue its existence rather than upon its own volition. When, however, such an institution, which may originally have been organised voluntarily, becomes the ultimate decision making authority – like the modern state has become – and is able to prevent its component parts from exercising any significant autonomous power that would seal its fate, then the anti-liberating effects of consolidation and centralisation will be felt. This has been the case with the United States which, having started off as an association of small, independent, sovereign states has become, at least since the American Civil War, a compulsory union with the power concentrated in Washington DC rather than in the state capitals.

Decentralisation cannot depend solely upon formal, constitutional arrangements or treaties and it is naïve to argue that such set ups are adequate. What matters is where the de facto ability to enforce decision making power lies. An individual shareholder has de facto power over a company, for instance, because a court will enforce the sale of his shares and whatever other rights he may have. Technically, the individual member states of the EU remain wholly sovereign nations and, indeed, are so at this present time – the perceived loss of sovereignty of which its citizens complain has come in part from the fact that the politicians of the individual state governments have been happy to haemorrhage more and more powers to Brussels that override the individual, local needs of each country. However, if all of the military, policing and judicial might of the combined EU member states was to be consolidated in Brussels – which is, of course, the eventual aim of the super-statists – then it would be the case that no individual member state would retain the ability to enforce its sovereignty over the larger entity. Hence, it was a good thing for the UK to vote to leave the EU before such a consolidation occurred. What matters for the process of decentralisation and its liberating effects, therefore, is that any legal or enforcement system must be able to give effect to the decision making authority of smaller and smaller institutions. Therefore, large, standing armies, and consolidated police forces and judicial systems run from vast buildings in the capitals of large states, such as the Pentagon in Washington DC, are the biggest fears for those of us who wish to achieve a world of liberty – and with it, a world of peace and prosperity.

On June 23rd of this year, Britain will hold a referendum on its membership of the European Union, voting either to remain (“Bremain”) or to leave (“Brexit”). The present author is rooting for a “Brexit”, which is unsurprising for a libertarian who detests any metastasised growth of the state that the EU certainly represents. Unfortunately, in spite of the passionate rhetoric that the issue tends to inspire in the so-called “Brexiteers”, from a libertarian point of view it is difficult to reconcile oneself with, or to endorse, some of the arguments that are emanating from the “Brexit” camp. In other words, it would be a mistake to characterise the debate as a defiant band of liberty lovers seeking to shake off the tyrannous ogre of a bloated, continental tyrant, although that is surely part of the motivation. Rather, many of the “Brexit” arguments, seeking to respond to the “Bremain” side, are couched in the same conventional, statist terms. They therefore lack any incisive bite that would provide a convincing case for withdrawing from the union.

The most prominent issues where this is visible are economic growth and trade. When it comes to the former, both sides fling at each other hypothesised GDP figures that show either a marked gain or reduction in the number. Obviously “Brexiteers” are attempting to show that the figures would be higher outside the EU whereas “Bremainers” are attempting to show the opposite. However, simply adding up flows of monetary expenditure (and then expecting the public to comprehend the methods and assumptions involved in doing so) in order to try and get a bigger, magic number than the other guy tells you very little. If you had a billion pounds yet the only thing to spend it on in the entire world was a loaf of bread then you would be in abject poverty in spite of your nominal wealth. The key to encouraging economic progress is increased investment in capital goods such as factories, machines and tools developed with ever better technology, which permits more consumer goods to be produced per worker, thus lowering prices and making more things affordable for everyone. The kind of economic system that best incentivises this accumulation is one of strong private property rights, minimal regulation and minimal taxation. GDP figures can be high in spite (or even because) of the fact that these things may be absent, as it is buoyed by monetary inflation and government spending. The relevant question, therefore, is whether the EU is likely to either promote or discourage this kind of environment. Instead of arguing over GDP projections the answer that “Brexiteers” should be giving is that the consolidation of states makes it more likely that property rights will be diminished while taxes and regulations rise. Smaller states do not usually possess within their territories all of the resources they need to build a strong economy. In much the same way as a single household or individual needs to go shopping at the grocers, the butchers, the bakers and so on, so too does an individual state need to go “shopping” in other countries, trading what they have for things they do not have. Burdensome regulations simply discourage this trade, while high taxes and insecure private property rights will deter foreign investment, all of which will seek more favourable markets as a result. Moreover, if the state becomes too onerous it is far easier for citizens of even modest means to leave a small state than it is for them to leave a larger state. Large, consolidated states, on the other hand, usually have access to a wide labour market and a greater number of resources, and are better equipped for a degree of autarchy. Moreover, the large state’s sheer, geographical size makes it more difficult for a citizen to emigrate to a similar country which is unaffected by the large state’s diktats. The large state will therefore step up its plundering of the citizenry as it is shorn of any real impetus to cease doing so. What produces trade and economic progress, therefore, is not consolidating states into one giant monopoly, which has a reduced incentive to relax its depredations upon its citizens. Rather, it is allowing states to compete with each other to attract entrepreneurial migrants, investment and trade. In other words, while creating a trading block may give the appearance of vanquishing border controls, tariffs and other trade restrictions it does not stop the trading block from imposing internal taxes and regulations that are more burdensome to trade and prosperity than those between independent states. Indeed, a high rate of internally imposed Value Added Tax (VAT) can be worse than a tariff. And, as the “Bremainers” trumpet, while it is true that within a single market companies no longer have to deal with a myriad of different tax rules, different regulatory codes, and so on, it is likely to prove less costly in the long run to deal with many light and fleeting taxes and regulations than it is to deal with one behemoth. Just to give an idea of how big and bloated the EU bureaucracy is, one source (Brexit: The Movie) lists a whole host of household items one encounters between waking up in the morning and eating breakfast:

There are 109 regulations for pillows, and 50 for duvets and bed sheets;

65 EU laws cover bathrooms;

31 for toothbrushes and 47 for toothpaste;

172 laws for mirrors, for some reason;

91 for showers, 118 for shampoo, and an incredible 454 for towels;

At the breakfast table, there are 1,246 regulations for bread, 52 for toasters, 64 for fridges, 99 for cereal bowls, 201 for spoons, and 625 for coffee;

Far ahead, however, is milk which has been deemed to deserve an incredible 12,653 EU regulations.

None of this is to imply, of course, that a world without the EU would be wholly unregulated. Rather, regulation will come from the market place and it is consumers who will decide whether products should meet certain standards. Moreover, increased quality and better safety comes about through the wealth creating endeavours of free individuals so that these things become more affordable, not through the wealth distributing fiat of faceless bureaucrats in Brussels.

Concerning specifically the issue of trade is the argument over whether Britain would, outside of the EU, be able to negotiate so-called “trade deals” without the backing of the EU. In his final visit to the UK as President of the United States, Barack Obama indicated that Britain would be “at the back of the queue” for trade deals owing to what is presumed to be its diminished influence outside of the EU (although this attitude did not stop him, in the same trip, from preaching to an audience of young gullibles an instruction that they should “reject pessimism and cynicism”). The response of “Brexiteers” has been to try and demonstrate how trade agreements would, in fact, be possible and how Britain would open itself up to being able to deal with other large markets, such as China and India, independently. While the latter is certainly true, all of this is wide of the mark. For trade agreements between states are precisely what we wish to avoid. Trade agreements do not open up trade at all; rather they stifle it. Genuine free trade can be accomplished by adhering to a single principle that can be written in a single, short sentence: no restriction of trade across borders. Trade agreements, however, which frequently masquerade as free trade agreements, are simply government managed trade. The North American Free Trade Agreement (NAFTA), for instance, runs to more than 1,200 pages across two volumes of government imposed rules and regulations, usually in order to grant protectionist privilege to a handful of powerful firms and interests. Indeed, one of the motivations for “Brexit” is for Britain to avoid the Transatlantic Trade and Investment Partnership (TTIP) between the EU and the US, which is seen as giving too much power to overseas corporations and ignoring environmental concerns. However, “Brexiteers” do not augment this rejection of a specific trade agreement to a rejection of trade agreements as a whole. One possible retort to this argument is that, in the absence of any kind of trade agreement, other countries could simply whack enormous tariffs and regulatory burdens on imported British goods, almost like some kind of punishment. In the first place it is, of course, far-fetched to believe that every one, or even most, of the significant markets with which British companies trade would do this. If a state shuts off or otherwise burdens trade from another state it ultimately harms itself as much as it harms the state upon which it has imposed the restriction. For if, prior to the elevated tariffs or increased regulations, certain resources or products were purchased from Britain it is because Britain produced these products at the best value compared to anyone else. Therefore, after the restrictions, the citizens of the other state must now pay more to produce the same goods internally or buy them from an alternative state, or must be content to purchase goods of lesser quality. Moreover, shutting off imports weakens a demand for a state’s exports as ultimately all imports are paid for with exports. It would, therefore, be foolish for states to respond to a “Brexit” in this way. The same argument applies to the EU itself. Another of the arguments from the “Bremainers” is that if Britain left then the EU would still be Britain’s largest trading partners with the power to impose its regulations on trade entering the block, in addition to newly imposed tariffs. Britain would be shorn of any influence whatsoever to change these rules, and would end up in much the same condition as some of the proximate outliers such as Switzerland and Norway are alleged to languish (never mind, of course, that GDP per capita in those countries is markedly higher than in every EU country). In the first place this argument shows just how few clothes the emperor is wearing. On the one hand, the EU is supposed to be committed to promoting trade and commerce yet on the other hand, if you dare to leave it, you will be shut out by tariff walls and have to suffer whatever burdens the EU rains down upon you. Clearly, therefore, the EU is far from being a promoter of peaceful trade and prosperity. Rather, it is really nothing more than a protectionist club, like a gang of bullies in the school yard who look after each other yet terrorise the other kids. That aside, however, Britain’s “influence” does not come from its membership of the EU – rather, it comes from the value that the EU places on its partnership with Britain, which will ultimately boil down to Britain’s economic clout. If trade with Britain is valuable to the EU then Britain will have as much real influence outside of the club as it does inside; you do not stop talking to someone you need simply because you are not in a political union with them. If, on the other hand, Britain was a tiny, unproductive state that produced little then it would be ignored as a member of the EU just as it would be largely ignored as outside. That is why the larger, more prosperous states in the EU, such as France and Germany have most of the influence. Most of the arguments concerning the loss of any “influence” for Britain, both within the EU and on the so-called “world stage”, do not refer to the diminished influence that the average British citizen would have in improving his life and furthering his goals. Rather, it refers to the diminished influence that the British politician will wield following “Brexit”. Being a representative of a large territory such as the EU gives the state’s lackeys a much more prominent position at the table when they jet off, at taxpayers’ expense, to their plush conferences and summits to devise an ever increasing number of predatory ways in which they can burden the real wealth creators. In any case, however, the “loss of influence” argument seems to have received the final nail in its coffin in early May when it was alleged that Germany had a de facto veto over Prime Minister David Cameron’s renegotiation of Britain’s terms of EU membership. However, even if we imagined the worst case scenario where all of the countries of the world, including the EU, imposed punitively high tariffs and onerous regulations on British imports and refused to engage with Britain in any way shape or form, the latter would still benefit from making a universal declaration of free trade – no tariffs on imported goods and little or no regulation. This sudden reduction in cost would then make Britain a highly competitive market, reducing costs of inputs for British businesses, attracting investment, expanding output and lowering prices for British consumers.

Looking more broadly, what are we to make of the argument that the EU was the supposed solution to centuries of war and human rights abuses? Strictly speaking, the human rights obligations of European states depend not so much upon the EU but, rather, upon whether they sign up to the European Convention on Human Rights (ECHR), which dates from 1953. The Convention is used as a convenient short hand for states to demonstrate their commitment to human rights, which is a condition of EU membership, and jurisprudence from the European Court of Human Rights normally plays an important role in determining how member states should implement EU law in accordance with their human rights obligations. Nevertheless, even though, as libertarians, we must be suspicious of any kind of government implemented human rights charter, which simply cherry picks certain pleasantries, subjects them to state regulation, and calls them “rights”, it would be possible for a member state of the EU to leave and still remain a party to the ECHR. Somewhat perversely it is, in fact, prominent “Bremainers”, such as Home Secretary Theresa May, who are campaigning for Britain to withdraw from the ECHR while remaining in the EU. The possibility of war however, is an important issue, with Mr Cameron himself having argued that leaving the EU would increase the risk of Europe descending into war. In the first place we have to wonder why, if the situation was that grave, Mr Cameron’s commitment to the EU was so ambiguous before he achieved his so-called “reform deal”, which renegotiated Britain’s EU obligations in areas such as welfare and immigration. Prior to this he supposedly had no “emotional attachment” to the EU and at least gave the impression that he may campaign to leave if the reforms failed. Mr Cameron was effectively saying that if he was devoid of an “emotional attachment” to the EU he was also devoid of an “emotional attachment” to avoiding war, the latter of which is surely more important than tweaking the conditions of EU membership. That aside, however, we have to wonder what this argument – the possibility of European war – makes of the so-called “democratic peace theory”. This is the idea that democracies are less likely to go to war with each other, and is peddled by pretty much the same people who crow for political unity. Weren’t the continent’s wars started by despotic monarchs and crackpot dictators? Surely now that we all bask in the bliss of democracy we won’t be so eager to fight each other? Why do we need something more? Regardless of this, however, the argument that a diminution of the EU will lead to war is ridiculous – indeed, it is the opposite that is more likely. Wars are started and fought by states; human rights are abused by states; the state, in the twentieth century alone, caused more deaths than private criminals in the whole of human history. Even the greatest efforts of sub-state, politically motivated actors – i.e. “terrorists” – pale in comparison to the carnage and destruction wrought by states. If this is true, it stands to reason that the solution to preventing this is to make states smaller and weaker, not bigger and stronger. The most destructive, and most potentially destructive conflicts we have ever experienced – the two world wars and the Cold War – occurred after the consolidation of smaller states into large territories, namely Germany, Italy and the Soviet Union. The origins of both of the world wars is complex, of course, but a fundamental cause was the drive of the unified Germany towards autarchy. As an industrialised country, Germany relied upon the import of food and the export of manufactured products in order to pay for it. The costs and burdens heaped upon German industry in order to fund the Bismarckian welfare state hampered German production, leading to fewer exports and fewer imports of food. Thus Germany looked to conquer the agrarian lands of Eastern Europe to overcome this self-inflicted handicap. What is clear, however, is that this problem was facilitated by the unified state, which was endowed with the wherewithal to grow the depredations of the state upon its industry and the might to launch invasions. Later, the persistent nuclear terror that was extant during the Cold War was made possible because territories as large and as rich as the United States and the Soviet Union could afford to fund things such as the Manhattan Project. The most aggressive and belligerent state today is the United States, which, together with its fawning collection of NATO allies, is driven by the neoconservative foreign policy agenda that seeks a unipolar world of American dominance. The greatest threat to peace is that such ambitions emanating from a large, rich and powerful state run head first into the ambitions of other large, rich and powerful states – namely, China and Russia, as we are seeing lately with the expansion of NATO to Russia’s border, the demonization of the Russian president and the altercations in the South China Sea. The worst case scenario is that the world will be vaporised in a nuclear holocaust, something which is likely to get worse if the next US President, who will be elected in November of this year, continues down this path. It is clear therefore that the consolidation of states may reduce the number of potential warmongers – but the stakes are far, far bigger. The key to achieving peace and prosperity is free trade in a sound money environment. You do not have to point a gun at your butcher or your baker in order for him to hand over what you want; you simply have to offer him something that he wants and then you both get on with the rest of your day. Exactly the same is true on a global scale; individuals engaging in voluntary exchange without interference across borders will not fight each other. War and conflict result only when states infringe this harmony.

This leads us on to the so-called “democratic deficit” argument – the idea that the EU’s governance and institutions somehow lack democratic legitimacy. It is true that if the EU is perceived as beyond the control of the voters then tolerance for it will dissipate quicker than if they believe they are “having their say”. On the other hand, however, democratic legitimacy is something of a red herring. People possess a de facto control over the state, with or without democracy, the smaller and more local it is. Even if the EU reformed all of its institutions in order to eradicate the “democratic deficit”, the EU would remain as a vast territory in which the individual voter vanishes into an ocean of 500 million others and its institutions would still amount to a vast bureaucracy awash with special interests that speak umpteen foreign languages making it impossible for the voter of any individual country to understand precisely what is going on. This can point can be made without us having to resort to the wider libertarian critique of democracy as an enabler of, rather than a restriction upon the state.

In drawing all of what we have said together, we will conclude with an observation that is likely to resonate with libertarians. When it comes to the big issues such as economic progress, trade, and promoting peace and prosperity, all of the arguments in favour of the EU boil down to the assertion that the EU makes it easier to get rid of state imposed restrictions and to vanquish ills that are created by the state. In other words, the EU is supposed to be good not because it actually achieves a positive accomplishment over the restrictions imposed upon humans by nature (such as a new product or service), but because it clears away artificial roadblocks that states have put in the way. If this is true, perhaps it would be better to address the question of whether we need the state at all, rather than whether we need a giant one such as the EU.

Politicians and mainstream economists have been warning us again lately of the so-called “deflation danger” – the idea that falling prices is calamitous for economic growth and that a perpetual and ceaseless price inflation is needed in order to bring us back to prosperity. With price deflation, so these sages tell us, lower prices today cause people to expect prices to be lower tomorrow so that, as a result, they put off their purchases until a later date, which causes prices to fall further and further. Hence we end up in an endless downward spiral of depression and impoverishment. Inflating prices, however, cause people to buy today so that they may insulate themselves from future price rises, thus bringing about economic growth and an increase in the standard of living. This fresh round of deflation warnings comes in the wake of the news that prices in the Eurozone were 0.2% lower than at the same time the previous year – something of an hilarious travesty when, regardless of the merits of the deflation thesis, this figure amounts to little more than a rounding error.

In basic economic theory, a price will fall as a response to the fact that demand is insufficient to meet supply at the current price. For some reason – say, as a result of the revelation of malinvestments – the demand curve for a particular asset or good shifts sharply to the left, meaning that prices now have to fall in order for the inventory to be sold to a willing level of demand. It will eventually settle at such a level. Indeed, all of the talk of “illiquid” and “toxic” assets on the balance sheet of banks following the 2008 financial crisis resulted from the unwillingness to find these lower prices and to, instead, retain assets at the old, inflated prices. Any asset, however, is surprisingly liquid when you offer a low enough price for it. However, the deflation thesis rests on the proposition that the initial fall in price, based on some exogenous factor, will then in and of itself cause a further shift in the demand curve to the left so that prices have to fall further. And then that this second price fall will cause yet another shift in the demand curve and prices will fall even further. Hence the thesis requires repeated, fresh rounds of shifting demand curves which are caused by nothing other than a previous shift in the demand curve.

However, there is no reason to suggest that prices falling as a result of a genuine, external change in valuation will, in and of themselves, cause further price falls. Indeed, every businessman will tell you that if you lower prices people will buy more and if you raise them people will buy less – precisely the opposite of the deflation thesis. More importantly, however, even if such price falls did result, there is no further reason to suggest that it would cause economic calamity. First, goods are, at the end of the day, evaluated for the ends that they meet. The fulfilment of these ends, as a result of the logic of human action, cannot be put off indefinitely and each individual will have to consume at some point. A person may simply be waiting for prices to bottom out before he purchases but there must come a time where he believes this to be. Taken to its logical extreme, the deflation thesis suggests that falling prices will cause people to simply stop acting altogether – that they cease seeking the fulfilment of ends through means. This will never happen so long as they remain human. Indeed, price deflation in entire industries – particularly in personal technology, such as computers and mobile phones – has not caused the collapse of this sector precisely because the value of owning a more expensive computer today is greater than that of waiting for a less expensive one in, say, three years. In other words, even if a person knows that a computer may cost £1000 today but only half as much in three years, he will still spend £1000 today if the benefit to be derived from the computer today is more valuable than saving £500 and waiting three years for that benefit. Second, viewed from the point of view of the satisfaction of each individual’s ends, there is no reason to suggest that artificially inflating prices, thus causing a person to buy sooner, will cause a greater fulfilment of that person’s ends compared to an economy where there is no deliberate price inflation. From that individual’s point of view, the earlier purchase may be wasteful compared to the later purchase he would have made had prices not been forcibly inflated. Third, even though the opposite of “catastrophic” deflation – namely, hyperinflation – in and of itself causes shifts in the demand curve to the right that accelerate the price rises, the motivation for this is not so much the rising prices as the realisation, on the part of the public, that the currency is worthless. Hence, a hyperinflation always ends in a flight to other currencies and stores of value. Indeed, following the recent Zimbabwean hyperinflation, the government there has gone as far as to recognise no fewer than nine foreign currencies as legal tender. No such realisation exists during falling prices and, funnily enough, people do not seem to be eager to flee to inflating currencies during a deflation! Fourth, there is no reason to suggest that falling prices will dampen business prospects. Nominal revenue will, of course, fall during a general price deflation. However, the success of a business – measured by its profit – depends not only upon the height of its revenue but also upon the height of its costs and these too are falling. Businesses would only put off purchasing and investing if revenue was predicted to remain constant while costs were predicted to fall, or fall further. If, however, falling revenue is met by falling costs then there still exists a profit motive, with every incentive to invest and trade today. Fifth, much of the deflation fear comes from the monetarist analysis of the Great Depression where, indeed, there was a monetary contraction1. However, the stagnation during that era was not due to the deflation per se but because of the widespread attempt to keep wages and prices high in spite of the monetary contraction. Had prices been allowed to fall then recovery would have been much swifter.

The real reason for the deflation scare is, of course, because perpetual inflation serves to protect the vested interests of the state and its corporate cronies and banker elites. The characteristic of any deflation is that the purchasing power of the monetary unit becomes stronger; all else being equal, therefore, assets that are merely quoted in the unit of currency and promise to pay no amount of fixed currency – such as shares, houses, precious metals, and so on – will fall in value. However, assets that are denominated in the unit of currency and promise to pay a fixed number of dollars, euros or whatever – such as bonds and debt instruments – will not lose value. Governments and banks, having benefited from borrowing cheap, printed money, used it to purchase assets that are mostly dollar quoted while their liabilities are dollar denominated2. Hence, a deflation would cripple the prices of the government’s or a bank’s assets while leaving its liabilities untouched. Hence not only large banks but entire states would be obliterated by bankruptcy. Clearly the political-banker elite cannot permit this to happen. The need for constant inflation is not, therefore, something that is necessary for economic growth and the wellbeing of the general public. Rather, it is necessitated by the asset-liability mix brought about by previous inflation which would threaten the existence of large, establishment institutions if it was to reverse. They need more cheap money, more theft of your purchasing power, in order to keep their assets rising and their liabilities from doing the same. The deflation myth, therefore, is nothing more than a part of the big statist fraud, benefitting a select few and the expense of everybody else.

1Although the failure to overcome this was not from want of trying – see Murray Rothbard, America’s Great Depression, Part III, where he argues that the deflation was the result of factors that negated the inflationary response of the government and the Federal Reserve.

2Although mortgages, which were a heavy factor in the 2008 financial crisis, are dollar denominated, the security behind the loan – the amount the lender will receive in the event that the borrower can no longer pay – is the house that the mortgage has been used to purchase. This asset is merely dollar quoted and hence during a deflation the value of the security of a bad mortgage will dissipate and with it any chance of recovery at par for the mortgagee.

The world’s political systems today are, generally, neither fully despotic on the one hand, nor are they completely anarchical on the other. Instead most of us languish under so-called “social democracy”, a curious mixture in which a degree of sovereignty in the form of voting rights reside in the citizenry while political leadership and control remains distinct in the form of various functionaries such as Presidents, Prime Ministers, Congressmen and Members of Parliament. A libertarian might contend, of course, that such a social democratic system is worse for individual liberty than a dictatorship or monarchy, but the important point is that the ideological extremes have been blended into a kind of soup which is, at least from the de jure point of view, really neither total freedom on the one hand nor total despotism on the other. In exactly the same way, neither do our economic systems (which amount to pretty much the same thing as political systems) represent any ideological purity. We are neither fully capitalist nor are we completely socialised but, rather, have to put up with some kind of “mixed” economy with capitalistic and socialistic elements.

Although the relationship between economic and political systems is one joined at the hip, the justification of social democracy on the one hand and of the mixed economy on the other appears to come from different directions. Democracy, rightly or wrongly, is believed to a good and noble thing in its own right – a positive and independently justifiable improvement over any other option. The mixed economy, however, appears to be based on little more than the intellectually slothful adage that “the truth lies somewhere in the middle”. Capitalism, it is alleged, while bringing massive economic growth and improvement in the standard of living, leads to unstable business cycles and encourages greed, selfishness and extensive inequalities in wealth and income. Socialism, on the other hand, may make things “fairer” and more equal yet it totally decimates the productive capacity of a nation and the standard of living stagnates or even reverses. The “correct” system “must”, so the argument goes, lie in between these two points, somewhere that can seemingly take the best of both systems while avoiding the alleged pitfalls. Hence we end up with the mixed economy.

The first question we might as well ask when tackling this fallacy is that if we adopt a position somewhere in between these two alleged extremes what argument is there to suggest that we will end up with the “best” aspects of each system rather than the worst? In spite of the socialistic element income inequality and wealth concentration in the hands of a few elites seems to be worsening, not getting better; and in spite of the capitalistic element we have failed to have any meaningful growth since 2008. May be it is the alleged good parts of each system that are cancelling each other out and not the bad? The fundamental flaw, however, is that the assessment of the characteristics of capitalist and socialist economies that identifies their good and bad aspects are partly wrong and it is the wrongly diagnosed parts that are exaggerated in making the case for a mixed economic system. The good aspects of capitalism, private property and free exchange – such as economic growth and marked increases in the standard of living – are, as we know from “Austrian” economics, true; the bad aspects, on the other hand – selfishness, inequality, greed, the business cycle, and so on – are largely false or misstated. Capitalism does not encourage anyone to be greedy or selfish at all – it just gives you the freedom to be as greedy or altruistic as you like, provided that you fulfil those ends through voluntary trade and do not engage in outright theft or fraud. What opponents of capitalism don’t like is that people, when set free, usually choose to pursue their material welfare as the first priority, while also overlooking the fact that the resulting productivity usually reduces poverty anyway. Even if it didn’t, however, it confers upon people the wherewithal to be more charitable out of choice and it is no mystery that many of the great charitable foundations – such as the Salvation Army, the YMCA, the Scout Movement and the Rotary Club – were founded in the nineteenth century or early twentieth centuries, the relatively most capitalistic period in history. Moreover, the business cycle, as we know, is not an inherent feature of a free market economy, but is caused by credit creation, something that is only sustainable with government and central bank sponsorship. Yet when justifying the “mixed” economy it is these bad aspects that are cited and emphasised in an attempt to cajole people into accepting a blended economic system. Turning to socialism, we know that such a system would obliterate all productivity and the standard of living would sink far below that to which we are now accustomed. Its bad aspects are, therefore, all true. Yet the good aspects – greater equality, fairness, and anything that can be categorised under the current, in-vogue term of “social justice”, are all patently false. Socialism does not create any equality at all; it does not mean that every portion of wealth in existence will be carved up into equal shares for everyone to then enjoy. Instead, it transfers the power over whole resources from private producers, who must maintain their ability to satisfy consumers in order to retain that privilege, to politicians and bureaucrats. Nationalising an industry does not give you, the average citizen, any greater access to the goods and services tied up in that industry. Rather you are left even more at the bottom of the heap than before as the political lords and masters decide what that industry will produce, what prices you will pay, what level of service you will receive and you are stuck with whatever they decide to give you – providing that the inefficiency and waste of state run industries has anything left to give. The very reason why property rights and ownership exist is precisely because there is no agreement on how resources should be used. This problem exists under socialism as it does under capitalism and one person’s decision must, at some point, overrule all others; any equal “voting” influence that you might have in this regard may be restricted to a one off, catch-all election every four or five years and in the meantime you have to suffer whatever it is that the electoral victors throw down from their table. Under capitalism, however, your voting influence is felt all the time in a highly specific manner through your spending habits. If a producer fails to produce what you want at a price you can pay he loses you there and then. Not so under socialism where you have to put up with whatever the upper elite, controlling all resources, decides will be produced. Furthermore, providing social safety nets and welfare states in pursuit of some kind of “social justice” does not result in a society that is more caring and sharing. If anything, the adage “from each according to his means to each according to his needs” completely disintegrates any moral fervour. By separating individual productivity from individual reward, wealth creation is turned into an stockpile to which a person contributes that which he is able according to his “means” then takes out according to his “needs”. Unsurprisingly, every person seeks to minimise the amount he has to put in through toil and sweat and maximise what he can take out in goods and services that he can sit back and enjoy without effort. This results in a population that fails to cultivate its talents towards increasing wealth such as hard work, responsibility and self-reliance and replaces them with characteristics that make them needy and pitiful, with an added layer of laziness, corruption and freeloading. This is precisely the problem faced by our bloated welfare states today and why they are completely bankrupt – demand has swollen to such an extent while supply has been hopelessly dwindled. None of this is exactly the antidote to “greed” and “selfishness” that advocates of the mixed economy might expect. Additionally, the resulting scarcity usually spawns black markets and underground trade, increasing the scope of legally defined criminality and, in worst case scenarios, penalising the population for attempting to acquire what should be every day goods and services.

A further fallacy is the assertion that private enterprise does some thing” better than government while government does other things better than private enterprise and we should look to the “evidence” to decide who should do what. But by what standard do you conclude that something is being done better by one or by the other – and by what standard do we judge whether a certain activity should be carried on at all? Private enterprises make this judgment through the profit and loss test; the quantity and quality of resources devoted to production of a good and service is rationed by its ability to make a profit, indicating the height of its demand by consumers. A service will be of low quality or unavailable to certain sections of the population simply because consumers are not willing to support a more extensive level of production in that particular industry. The reason why broadband internet was not, in the UK, extended to all rural communities without the force of government was not evidence of “market failure”. It simply meant that the more extensive resources necessary when compared to urban areas were required more urgently to produce other goods and services that people wanted to buy. Any “evaluator” who determines from the “evidence” that government is needed for rural broadband cabling is necessarily substituting his own value judgments for everyone else’s, denying them the goods that they really demanded and giving them those that are not. Nor can we fall back on the assertion that government should run “essential” industries for there is no such thing as an “essential” industry. Humans do not evaluate goods and services in whole, homogenous concepts such as “fire services”, “health services”, “utilities” and so on – rather they are demanded in specific quantities in specific times and places. What is most highly valued by an individual changes from moment to moment. While we may think of “medicine” as “important” we can easily imagine ourselves in a situation where we would prefer to do something “unimportant” like watch television rather than produce another bottle of penicillin – and some people may not want medicine at all if they maintain their health. Precisely the point where we stop devoting resource to the production of penicillin and move them towards producing televisions can only be judged by the profit and loss test of the free market. Any other judgment is necessarily arbitrary and at variance with the demands of consumers. In any case, as libertarians, we might also ask if an industry is really critical why on earth would you want it in the hands of the government where it can be royally screwed up? And why would it even need to be? If it is heavily in demand then profit opportunities will abound and private entities will have no problem meeting it – it is the unessential industries with low demand that struggle to stay afloat without government support.

The real reason, of course, why we have ended up with this system is, in fact, pragmatic rather than intellectual. Capitalism is the goose that has laid the golden egg and any decimation of capitalism would very quickly destroy the standard of living of the citizenry, prompting a swift revolution. Yet government yearns for power and control and cannot be content with letting things be; it therefore has to paint capitalism as this necessary evil which, like a dangerous pet, somehow brings good things when controlled in the right way. Ironically, of course, it is government interference in an attempt to provide a socialistic element that brings about the chaos and injustice that is blamed on capitalism. We have boom and bust because of government-sponsored credit creation, and the rich are getting richer and the poor poorer because the government bails out these cronies from the resulting disarray at the expense of the rest of us. Indeed, having a “safety net” against the alleged “sink or swim” nature of capitalism has turned out very well if you are an investment banker. None of this would happen in a genuine, capitalist economy.

The mixed economy is therefore nothing but an unjustifiable charade, built upon alleged weaknesses of capitalism and supposed strengths of socialism that simply do not exist. Genuine economic prosperity for everyone in a fair and just society populated by morally healthy individuals can only come through unfettered private property and free exchange – not through government’s attempt to meddle with it.

The belief that economic growth is boosted by consumption is based upon such a simple misunderstanding that a realisation of the truth will cause one to question why such a simple fact evaded you in the first place.

The confusion is based on a conflation of the desire to consume on the one hand with the act of consumption on the other. It is true that all economic growth, and all economic activity, is motivated by the desire to achieve consumption – in other words, to devote scarce resources in order to satisfy our most highly valued ends. Without any desire to consume or to satisfy any ends there would never be any economic activity whatsoever. The act of consumption, however, does not in and of itself fuel any economic growth. For consumption is the result of growth – i.e. of increased production – and not the initiator. Consumption is what we reward ourselves with once we have achieved growth and not that which we do in order to begin it. Stated in its simplest way you cannot consume a good unless it has first been produced.

At any one moment in time there is an array of produced goods available to us. Each of us faces a basic choice as to what to do with these goods – consume them now, or turn them into productive capital goods that will yield a greater output of consumption goods in the future. If we choose the first path – consumption – all we do is reduce the number of goods available to us and we are left with less. We may have achieved immediate satisfaction but we now have fewer resources left with which to produce more in the future. If I burn a log of wood to keep warm I cannot then use it as building material later. Rather it is gone forever and I will now have to labour in order to search for fresh building materials if I am to make good this loss. A farmer who decides to eat the seeds for crops in the spring will then have nothing to sow and come harvest time will have barren and empty fields rather than lush acres full of wheat. Beyond the point of providing nourishment and sustenance to the human body the act of consuming of these goods will not provide any growth. Consumption, for the most part, is the destruction of what we have. Growth is the transformation of what we have into something that will produce more for us in the future. If we choose the second option – that of turning our goods into productive resources – rather than destroying the resources available to us we will invest them in productive enterprises that raises the yield of consumer goods in the future.

The key to promoting growth, therefore, is not to encourage the act of consumption which equates with an act of destruction. Rather it is to encourage production and a direction of a greater proportion of our resources available today towards saving and investment so that we may consume more in the future. This is particularly important following a bust that results from a boom or bubble inflated by credit expansion. With so many malinvestments left starved of resources the best thing we can do to minimise the pain is to increase the proportion of saving and investing so that at least some of the doomed projects may realise a degree of viability. Instead our economic lords and masters do the precise opposite and encourage us to borrow, spend and consume which only exacerbates the losses experienced by those projects that were started in the boom. Growth must begin with saving, sound investment and production which is then rewarded by greater consumption. Consumption will never lead to growth and it is important for Austro-libertarians to point out this grave fallacy.